Wendy's Flips to A Buy

In 2007, after a decade-long 600% rally, shares of Wendy’s (NASDAQ: WEN) began a fast and furious 90% selloff. In less than two years, they were back trading at 1992 levels and things were looking grim for the queen of the square burger. They were able to steady the ship however and in early 2013 they again started off on a 500% run that lasted through the start of this year.

History mightn’t always repeat itself but it sure does rhyme. Amidst the recent carnage seen across equity markets in what was the stock market’s worst Q1 in history, Wendy’s shares shed 70% of their value in just a matter of weeks this time. However, unlike ten years ago, buyers were quick to step in as Wendy’s shares flipped to a strong buy having been dumped incessantly for four weeks straight.

Now the stock is attracting analyst upgrades as a risk-on sentiment begins to creep back into equities and investors would do well to take notice.

Analyst Upgrade

On Wednesday this week, Wedbush upgraded Wendy’s to ‘outperform’ from ‘neutral’ and noted that “Wendy’s is relatively insulated from near-term headwinds from COVID-19, and is well-positioned for accelerated top- and bottom-line growth in a post-COVID world.” The company’s management itself was out with a bullish note to investors late last month, letting them know that they were confident in their ability to navigate the crisis and to come out relatively unscathed. Same-store sales growth was still trending up through March 22, even after a 20% decline was accounted for.

Wendy’s had only just released a breakfast menu at the start of March and double-digit percentage jumps had been seen in their sales numbers immediately. This bodes well for a company that famously refuses to cut corners. As the initial shock and fear caused by the pandemic recedes and shelter in place orders are lifted, Wendy’s low cost, fast food meals will still be a firm favorite among millions of Americans, particularly those whose income have been slashed.

Similar to McDonalds

In many ways, their near term trajectory and prospects are similar to McDonald’s (NYSE: MCD) who are also banking on a swift return to normal as soon as they can reopen their stores. The shares of each company had moved step for step in recent years and in the five years prior to this past February, both stocks were up over 130%. In the carnage that followed though, Wendy’s fell more than 70% while McDonalds ‘only’ fell 30%. Astute investors may have spotted the spread and bought the former and if they did, were rewarded with an eye-watering 120% bounce off the lows. Longbow Research commented in the middle of all this that Wendy’s stood well positioned to capture market share from any coronavirus forced closures of smaller, independent fast food joints that it competes against.

Getting Involved

It remains to be seen if volatility is truly receding from equities or if investors are being lulled into a false sense of security through the end of March relief rally. Either way, Wendy’s has shown that when there’s blood on the street, it can offer a gift of a buying opportunity. With a 3.4% dividend yield, investors can take a long term approach to any position, confident that the odds are with them on being rewarded through quarterly payouts and or long term capital gains.

If markets take another dip, there’s attractive support around the $7 mark where buyers were quick to step in last month. To the upside, $16 remains the peak of the recent bounce and will be the first number to beat as part of any full-blown recovery to the $20s.